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The Minnesota Model to Rein in Predatory Lending

Representative Jim DavnieMinneapolis, Minnesota

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Presentation overview

Exploration of problem nationally, and in Minnesota.Review of Minnesota efforts.Looking forward in Minnesota and nationally.

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Foreclosure hotspots

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National mortgage delinquency rates

ARM & FRM Delinquency Rates (percent)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Q1/1998 Q1/1999 Q1/2000 Q1/2001 Q1/2002 Q1/2003 Q1/2004 Q1/2005 Q1/2006

Prime Fixed Prime ARM Subprime Fixed Subprime ARM

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18.0016.00

14.00

12.0010.00

8.00

6.004.00

2.00

0.00Q1/1998 Q1/1999 Q1/2000 Q1/2001 Q1/2002 Q1/2003 Q1/2004 Q1/2005 Q1/2006

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Roots of the crisis I

Loosening of underwriting standards since 2005Tax law changes making rental property ownership more inviting (Minnesota)Securitization and disconnect between brokers and borrowers interestsFraud

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Roots of the crisis II

Rapid escalation of housing values placing higher demands on borrowersSophistication of mortgages outstripping sophistication of borrowersBetting on appreciationFraud

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Supply side

“…yield hunger and ample investment capital drove the subprime lending push. It was not consumer driven.”

Tom Bengston, Editor North-Western Financial review Lawmakers magazine

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Rise in subprime mortgage lending

“Not all subprime loans are predatory, but nearly all predatory loans are subprime”Professor Jeff Crump, University of Minnesota

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Unequal impact

Lenders on average made subprime loans to higher-qualified African-Americans 54% of the time, compared to 23% for Caucasians.

National Community Reinvestment Coalition

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The Minnesota experience400% in foreclosures in Twin Cities metro area 2001-2006 64% Increase in foreclosures in Greater Minnesota (outside the Minneapolis-St. Paul metro area). 100% increase in foreclosures in Minneapolis in 2006 from 2005.

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Minneapolis

2,152 housing units went to public auction in Minneapolis in the first three quarters of 2007

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TimelineTimelineSummer 2006: Minneapolis and Hennepin County identify up tick in foreclosuresDecember 2006: Attorney General-elect Lori Swanson convenes Predatory Lending Study GroupJanuary 2007: Study Group issues reportFebruary 2007: Legislation introducedApril 2007: Signed by GovernorAugust 2007: Effective date of legislation

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Predatory Lending Study Group

Created by Attorney General-elect Lori SwansonChaired by University of Minnesota Law ProfessorMembership included representatives of the business community, Legal Aid, ACORN, community bankers, non-profit developers, legislators, and the Council Presidents from both central cities city councils.

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Elements of the legislationLenders and brokers must verify a borrower’s ability to repay the loanLenders may use criteria other than traditional documentation to justify making the loan but must document alternative criteria through reliable methodsFor ARMs, lender must verify that borrower can qualify for “fully indexed rate,” not just teaser rate

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Brokers Must Act in Client’s Best Interest

Brokers now have a legal duty to act in the best interest of the borrower.Brokers cannot accept compensation that is undisclosed to the borrower.Payments from lender to broker must be included in calculation of lender fees.Lender fees are capped at 5% of loan amount. Side payments from lender to broker (“yield spread premiums”) count toward 5%.

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Negative Amortization Loans ProhibitedLenders can no longer make loans that are structured so monthly payments don’t cover all the interest that is accruing on the loan.

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Other Prohibitions“Churning” – refinancing that doesn’t benefit the borrowerPrepayment penalties for subprime loansRefinancing “special mortgages” without loan counselingPartial payment quotes (without taxes and insurance) without telling borrower – must be able to compare accurately

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Victims have new remedies Borrowers who are harmed by violations of the standards set forth for brokers, lenders, and appraisers now have a right to sue for damages, costs, and attorney fees Does not apply to loans originated by a state or federally chartered bank, savings bank, or credit union

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A new crime-mortgage fraudAnyone who falsifies information on mortgage application, or anyone who facilitates the use of such information in connection with getting a mortgage with the knowledge that the information is false, can be prosecuted for the crime of mortgage fraud

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Some Lenders Exempt

Some provisions (verify ability to repay, churning, negative amortization, disclosing P&I) do not apply to a state or federally chartered bank, savings bank, or credit union, or to a loan originated or purchased by a state agency or tribal or local unit of government

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Looking forward in Minnesota

Five work groups createdForeclosure modernizationMunicipal impacts and toolsTenant/condo concernsData requirementsForeclosure prevention assistance

Broad stakeholder participation

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Looking Forward IMedian average home sales price down 4.6% over past 12 months.

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Looking forward nationally II

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Looking forward nationally IIIIncreased stress on consumers

Rising gasoline pricesNational average $3.08/gal regular

Rising heating costsNatural gas prices projected 41% higher than 06

!.2 million utility consumers disconnected nationally

Rising grocery costsGrocery prices projected to rise 7.5% for 2007, roughly triple core inflation rate

Increased revolving credit debtCard issuers seeing increased delinquency rates

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AcknowledgementsSenator Linda HigginsDr. Michael Grover, Minneapolis Federal Reserve BoardGreater Minnesota Housing FundHousing LinkCara Letofsky, City of MinneapolisAmber Hawkins, Foreclosure Relief Law Project

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Representative Jim DavnieDistrict 62A — South Minneapolis.

545 State Office Building, St. Paul, MN 55155. 651-296-0173.

rep.jim.davnie@house.mn